RESEARCH QUARTERLY First Quarter 2018 RESEARCH REPORT

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1 RESEARCH QUARTERLY First Quarter 218 RESEARCH REPORT

2 RESEARCH QUARTERLY RESEARCH REPORT 1Q 218 TABLE OF CONTENTS Table of Contents... i Capital Markets Overview... 2 Municipal Bond Market... 3 Treasury Market... 4 Federal Agency Debt Market... 6 Funding and Money Market Instruments... 7 Mortgage-Related Securities... 8 Asset-Backed Securities... 9 U.S. Collateralized Loan Obligations... 1 Corporate Bond Market Equity and Other Markets The report is subject to the Terms of Use applicable to SIFMA's website, available here: SIFMA is the voice of the U.S. securities industry. We represent the broker-dealers, banks and asset managers whose nearly 1 million employees provide access to the capital markets, raising over $2.5 trillion for businesses and municipalities in the U.S., serving clients with over $18.5 trillion in assets and managing more than $67 trillion in assets for individual and institutional clients including mutual funds and retirement plans. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). For more information, visit i

3 RESEARCH QUARTERLY RESEARCH REPORT 1Q 218 CAPITAL MARKETS OVERVIEW Issuance in U.S. Capital Markets 1Q'17 vs. 1Q'18 Municipal Treasury Mortgage- Related Corporate Agency Asset Backed 1Q'17 1Q'18 Equity Note: Includes long-term issuance only Source: Thomson Reuters, U.S. Treasury, U.S. Federal Agencies Issuance Highlights - Year-Over-Year (1) 218:Q1 217:Q1 % Change Municipal % Treasury % Mortgage-Related % Corporate % Federal Agency % Asset-Backed % Equity % Issuance Highlights - Quarter-Over-Quarter (1) 218:Q1 217Q4 % Change Municipal % Treasury % Mortgage-Related % Corporate % Federal Agency % Asset-Backed % Equity % (1) Includes long-term issuance only Total Capital Markets Issuance Long-term securities issuance totaled $1.8 trillion in 1Q 18, a 4.6 percent decrease from $1.88 trillion in 4Q 17 and an 11.5 percent decrease year-over-year (y-o-y) from $2.3 trillion. Issuance decreased quarter-over-quarter (q-o-q) across all asset classes except Treasury, corporate, and equity while y-o-y, issuance decreased across all asset classes except federal agency. Long-term public municipal issuance volume including private placements for 1Q 18 was $67.6 billion, down 53.8 percent from $146.4 billion in 4Q 17 and down 27.4 percent from $93.1 billion in 1Q 17. The U.S. Treasury issued $58. billion in coupons, Floating Rate Notes and Treasury Inflation Protected Securities in 1Q 18, up 8.3 percent from $535.5 billion in the prior quarter but 11.3 percent below $654.1 billion issued in 1Q 17. Issuance of mortgage-related securities, including agency and non-agency passthroughs and collateralized mortgage obligations, totaled $444.3 billion in the first quarter, an 8.1 percent decrease from 4Q 17 ($483.2 billion) and a 2.6 percent decrease y-o-y ($456.1 billion). Corporate bond issuance totaled $38.7 billion in 1Q 18, up 19.3 percent from $319.2 billion issued in 4Q 17 but down 21. percent from 1Q 17 s issuance of $481.9 billion. Of 1Q 18 corporate bond issuance, investment grade issuance was $319.1 billion (83.8 percent of total) while high yield issuance was $61.6 billion (16.2 percent of total). Long-term federal agency debt issuance was $177.7 billion in the first quarter, slightly down from $27.9 billion in 4Q 17 but up 7.6 percent from $165.1 billion issued in 1Q 17. Asset-backed securities issuance totaled $77.8 billion in the first quarter, a decrease of 49.6 percent q-o-q ($154.5 billion) and a 34.4 percent decrease y-o-y ($118.5 billion). Equity underwriting increased by 8.2 percent to $59.5 billion in the first quarter from $55. billion in 4Q 17 but down 1.3 percent from $6.3 billion issued in 1Q 17. Of the total, true initial public accounted for $16.1 billion, up 36.6 percent from $11.8 billion in 4Q 17 and up 44.8 percent from $11.1 billion in 1Q 17. 2

4 RESEARCH QUARTERLY RESEARCH REPORT 1Q 218 % Yield Short- 1 and Long-Term Municipal Issuance :Q1 Short-Term Long-Term Q1 1 Includes maturities of 13 months or less. Source: Thomson Reuters Municipal GO AAA and 1-Yr Treasury Ratio Apr Mar. 218 Average Daily Trading Volume of Municipal Securities 1 214:Q1-218:Q1 Source: Bloomberg, MMA 14:Q1 14:Q3 15:Q1 15:Q3 16:Q1 16:Q3 17:Q1 17:Q3 18:Q1 1 Includes both dealer-to-dealer and customer-to-dealer transactions. Source: Municipal Securities Rulemaking Board MUNICIPAL BOND MARKET According to Thomson Reuters, long-term public municipal issuance volume totaled $61.9 billion in the first quarter of 218, a decline of 54.6 percent from the prior quarter ($136.4 billion) and a decline of 28.5 percent year-over-year (yo-y) ($86.5 billion). Including private placements 1 ($1.4 billion), long-term municipal issuance for 1Q 18 was $63.3 billion. Tax-exempt issuance totaled $55.1 billion in 1Q 18, a decline of 53.9 percent q- o-q and 28. percent y-o-y. Taxable issuance totaled $5. billion in 1Q 18, a decline of 59.9 percent and 36.5 percent, respectively, q-o-q and y-o-y. AMT issuance was $2.2 billion in 1Q 18, a decline of 59. percent q-o-q and 19.6 percent y-o-y. By use of proceeds, general purpose led issuance totals in 1Q 18 ($17.2 billion), followed by primary & secondary education ($14.7 billion), higher education ($4.2 billion), water & sewer facilities ($4.1 billion) and toll roads/highways/streets ($3.3 billion). Refunding volumes plummeted to 19.4 percent of issuance in 1Q 18 from 47 percent in the prior quarter as advance refundings were eliminated beginning in 218 with the passage of the Tax Cuts and Jobs Act. 2 Yields, Inflows, and Total Return Ratios of 1-year tax-exempt AAA GOs and similar-maturity Treasuries remained unchanged in the first quarter on a q-o-q basis, averaging 86. percent in both 1Q 18 and 4Q 17. According to the Investment Company Institute (ICI), fourth quarter net flow into long-term tax-exempt funds was positive, with $1.7 billion of net inflow in 1Q 18 compared to $2.2 billion of inflow from 4Q 17 and $7.1 billion of net inflow y-o-y. According to ICE BofAML indices, municipals lost 1.1 percent in the first quarter of 218. For the first quarter, pollution control, multifamily, and tobacco bonds outperformed among the individual municipal sectors (a decline of.3 percent,.4 percent and.6 percent respectively) in 1Q 18 while tax, toll/turnpike, and utilities underperformed relative to other municipal sectors (a decline of 1.3 percent in all three sectors). Build America Bonds (BABs) also lost 1.1 percent in 1Q 18, performing similarly to tax-exempt bonds but outperforming similarly-rated corporate bonds (a total return loss of 2.3 percent). Trading Activity Trading activity fell q-o-q to $11.4 billion daily in 1Q 18, a 5.5 percent decrease from 4Q 17 ($12. billion) but a 2. percent increase from 1Q 17 ($11.1 billion). By number of trades, trading activity rose 9.4 percent on a q-o-q basis but fell.6 percent on a y-o-y basis. Broker-Dealers and Holdings Bank holdings of municipal loans rose in 4Q 17 from the prior quarter to $19.6 billion (from $183.4 billion) while holdings of bonds also rose slightly to $385.9 billion (from $383.5 billion). 1 Private placement figures are excluded in charts and tables. 2 Percentages represent both full refundings and the half the dollar amount of deals that contain both refundings and new financing. 3

5 RESEARCH QUARTERLY RESEARCH REPORT 1Q 218 TREASURY MARKET 3, 2,5 2, 1,5 1, Quaterly Gross Issuance of U.S. Treasury Securities 213:Q1-218:Q1 FRNs 1Q'13 3Q'13 1Q'14 3Q'14 1Q'15 3Q'15 1Q'16 3Q'16 1Q'17 3Q'17 1Q' TIPS Coupons CMBs Bills Source: U.S. Treasury -25 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 2,5 2, 1,5 1, Net Issuances of U.S. Treasury Marketable Debt Mar Mar. 218 Net Coupon Issuance (Notes and Bonds only) Net Issuance (including CMBs) Source: U.S. Department of the Treasury Gross Issuance of U.S. Treasury Marketable Coupon Securities Gross Issuance of U.S. Treasury Securities Total gross issuance of U.S. Treasury bills and coupons, including cash management bills (CMBs), Floating Rate Notes (FRNs) and Treasury Inflation-Protected Securities (TIPS), was $2.6 trillion in 1Q 18, up 14.8 percent from $2.26 trillion in 4Q 17 and a 15.8 percent increase from $2.42 trillion in 1Q 17. Treasury net issuance, including CMBs, increased to $458.5 billion in the first quarter, up from $27.1 billion in the previous quarter and up from net issuance of $39.7 billion in 1Q 17. First quarter net issuance was slightly less than the U.S. Treasury s net issuance estimates of $441. billion. 3. In 1Q 18, $8. billion in CMBs were issued, a 35.6 percent increase from $59. billion issued in 4Q 17 but a 42. percent decrease from 138. billion in 1Q 17 of CMBs issuance. The U.S. Treasury issued $58. billion in coupons, FRNs and TIPS in 1Q 18, up 8.3 percent from $535.5 billion in the prior quarter but down 11.3 percent from $654.1 billion issued in 1Q 17. Excluding TIPS and FRNs, total gross issuance of Treasury marketable coupon securities was $513.2 billion, up 1.7 percent from $463.5 billion issued in 4Q 17 but 11. percent down from $576.4 billion issued in 1Q 17. Net coupon issuance was $125.5 billion in 1Q 18, an 8. percent increase from the $116.2 billion in 4Q 17 and up 24.5 percent y-o-y. In 1Q 18, $32.2 billion in FRNs were issued, down 22.2 percent from $41.4 billion in 4Q 17 and down 26. percent from $43.5 billion in 1Q 17. Trading Activity The daily trading volume of Treasury securities by primary dealers averaged $569.6 billion in 1Q 18, a 14.9 percent increase from $495.9 billion in the previous quarter and a 5.5 percent increase from $539.7 billion traded daily in 1Q YTD Source: U.S. Department of the Treasury U.S. Treasury Securities Average Daily Trading Volume 213:Q1-218:Q Q'13 3Q'13 1Q'14 3Q'14 1Q'15 3Q'15 1Q'16 3Q'16 1Q'17 3Q'17 1Q'18 Note: Includes primary dealer activity only Source: Federal Reserve Bank of New York 3 Treasury s March borrowing estimates can be found here. 4

6 RESEARCH QUARTERLY RESEARCH REPORT 1Q 218 % Yield U.S. Treasury Yields Mar Mar yr Treasury 1-yr Treasury 5-yr Treasury 2-yr Treasury. Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Source: Federal Reserve Treasury Yield Curve In 1Q 18 U.S. Treasury yields increased for short-, medium-, and long-term securities. Two-year rates increased to 2.27 percent in 1Q 18, up from 1.89 percent end-december and from 1.27 percent end-march 217. Five-year yields increased to 2.56 percent end-march, up from 2.2 percent in 4Q 17 and from 1.93 percent in 1Q 17. Ten-year yields increased to 2.74 percent end-march, up from 2.4 percent end-december and up from 2.4 percent in 1Q 17. Thirtyyear yields ended 1Q 18 at 2.97 percent, up from 2.74 percent end-december but down from 3.2 percent end-march 217. FOMC Meeting Summary During its March 21, 218 meeting, the Federal Reserve s Federal Open Market Committee decided to raise the target range for the federal funds rate to percent. 4 In addition, the Board of Governors of the Federal Reserve System voted unanimously to approve a 1.25 percentage point increase in the primary credit rate to 2.25 percent, effective March 22, Statement from the FOMC Meeting, March 21st,

7 RESEARCH QUARTERLY RESEARCH REPORT 1Q 218 FEDERAL AGENCY DEBT MARKET 1,4 1,2 1, Long-Term Federal Agency Debt Issuance :Q Q 1 Excludes maturities of one year or less * Beginning in 24, Sallie Mae has been excluded due to privatization Sources: Thomson Reuters Long-Term Federal Agency Debt Issuance by Agency 218:Q1 Farm Credit, $26., 15% Farmer Mac, $2.1, 1% Fannie Mae, $2.5, 1% FHLB, $13.6, 75% Freddie Mac, $13.9, 8% Federal Agency Securities Average Daily Trading Volume 213:Q2-218:Q1 Other Sources: Federal Agencies Federal Home Loan Banks Freddie Mac Fannie Mae 13:Q2 13:Q4 14:Q2 14:Q4 15:Q2 15:Q4 16:Q2 16:Q4 17:Q2 17:Q4 Source: FINRA TRACE Federal agency long-term (LTD) issuance was $177.7 billion in the first quarter, a 14.5 percent decrease from $27.9 billion in 4Q 17 and a 7.6 percent increase from $165.1 billion issued in 1Q 17. Fannie Mae s 1Q 18 gross debt issuance, both short term debt (STD) and LTD, totaled $222.4 billion, a 1.2 percent decrease from $219.7 billion in 4Q 17 and a 47.9 percent increase from $15.4 billion in 1Q 17. STD issuance increased to $217.3 billion in 1Q 18 compared with $194.1 billion in 4Q 17 and LTD issuance also decreased to $5.1 billion in 1Q 18 from $25.6 billion in 4Q 17. Fannie Mae had $34.6 billion STD outstanding and $231.5 billion LTD outstanding at the end of 1Q 18, up 3.5 percent from the previous quarter s STD outstanding but down 5.2 percent from $244 billion LTD outstanding in 4Q 17. Freddie Mac s gross debt issuance totaled $88.2 billion in 1Q 18, a decrease of 2.3 percent from $11.6 billion in 4Q 17 and a decrease of 3.2 percent from $126.4 billion in 1Q 17. As of 1Q 18, Freddie Mac had $27. billion STD and $244.4 billion LTD outstanding, in comparison with $45.8 billion STD and $261.1 billion LTD in the prior quarter. The 12 Federal Home Loan Banks (FHLB) issued $13.6 billion in LTD in the first quarter, a decrease of.1 percent from $13.7 billion in 4Q 17 but an increase of 22.1 percent from $17. billion in 1Q 17. In 1Q 18, $1,785.4 billion of STD was issued, up 6.5 percent from $1,676.7 billion issued in 4Q 17 and up 32.8 percent from $1,344.4 billion in 1Q 17. Total FHLB LTD outstanding was $629.4 billion at the end of March, down from $642.2 billion outstanding in 4Q 17. Discount notes outstanding decreased to $389.8 billion in 1Q 18 from $392. billion in 4Q 17. Total Farm Credit System gross debt issuance for 1Q 18 totaled $59.6 billion, down 24.3 percent from the previous quarter s $78.7 billion and down 13.4 percent y-o-y. Total debt outstanding at the end of the first quarter was $269.7 billion, of which $22.6 billion was short-term and $247.1 billion was long-term compared to $25.6 billion short-term and $239.8 billion long-term in the prior quarter. Trading Activity Average daily trading volume of agency securities in the fourth quarter was $3.6 billion, down 13.2 percent from $4.2 billion traded in 4Q 17 and down 18.9 percent from $4.5 billion traded in 1Q 17. The quarter-over-quarter decline was primarily driven by Freddie Mac trading dollar volume declining 49.7 percent. 6

8 RESEARCH QUARTERLY RESEARCH REPORT 1Q 218 FUNDING AND MONEY MARKET INSTRUMENTS Percent Financing by U.S. Government Securities Dealers Average Daily Amount Outstanding :Q1 Reverse Repurchases Repurchases Q1 Note: Data include corporate securities. Source: Federal Reserve Bank of NY. Apr-13 Apr-14 Apr-15 Apr-16 Apr Financial & Nonfinancial Commercial Paper 3-Month Interest Rates Apr Mar. 218 Nonfinancial CP Financial CP DTCC GCF Repo Index TM Apr Mar. 218 Treasuries Agency MBS Sources: Federal Reserve Total Repurchase Activity The average daily amount of total repurchase (repo) and reverse repo agreement contracts outstanding was $3.94 trillion in 1Q 18, a decrease of 4.7 percent from 4Q 17 s $4.13 trillion but a slight increase of.3 percent y-o-y. Average daily outstanding repo transactions totaled $2.21 trillion in 1Q 18, a decrease of 4.2 percent q-o-q but an increase of 1.4 percent y-o-y. Reverse repo transactions in 1Q 18 averaged $1.72 trillion daily outstanding, a decrease of 5.3 q-o-q and a decrease of 1.1 percent y-o-y. GCF Repo Rates DTCC general collateral finance (GCF) repo rates increased for Treasuries and MBS in 1Q 18 on a q-o-q basis and y-o-y basis: the average repo rate for Treasuries (3-year and less) rose to 15.1 basis points (bps) from 4Q 17 s average rate of bps and 1Q 17 s average of 62.5 bps. The average MBS repo rate rose to bps from bps in the previous quarter and 64. bps in 1Q 17. Financial and Nonfinancial 3-Month Commercial Paper Interest Rates Interest rates for nonfinancial commercial paper (CP) rose to 28 bps end- March 218 from 153 bps end-december 217 and from 84 bps end-march 217. Financial CP increased to 19 bps end-march 218 from 143 bps end- December 217 and also rose from 83 bps end-march 217. Total Money Market Instruments Outstanding Preliminary outstanding volume of commercial paper stood at $1.5 trillion at the end of the first quarter, up 8.5 percent from the prior quarter s $965.9 billion and an increase of 11.9 percent y-o-y. 1.2 Percent Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Sources: The Depository Trust & Clearing Corporation Note: Agency rates were discontinued in October Outstanding Commercial Paper :Q $ Trillions Q1 Sources: Federal Reserve Note: Not Seasonally adjusted 7

9 RESEARCH QUARTERLY RESEARCH REPORT 1Q 218 MORTGAGE-RELATED SECURITIES 2,5 2, 1,5 1, Issuance of Mortgage-Related Securities :Q1 Agency 3, 2,5 2, 1,5 1, 5 MBS/CMO Non-Agency MBS Q1 Sources: Federal Agencies, Thomson Reuters Issuance of Non-Agency Mortgage-Backed Securities :Q RMBS CMBS Q1 U.S. Non-Agency Securities Outstanding :Q1 Sources: Bloomberg, Thomson Reuters RMBS CMBS Q1 Sources: Bloomberg, Thomson Reuters, SIFMA Average Daily Trading Volume - Agency Mortgage-Related Securities 216:Q2-218:Q1 Mortgage-Related Issuance and Outstanding Issuance of mortgage-related securities, including agency and non-agency passthroughs and collateralized mortgage obligations (CMOs), totaled $444.3 billion in the first quarter, a 14.1 percent decline from 4Q 17 ($517.4 billion) and a 3.9 percent decline y-o-y ($462.5 billion). The decline was due to decreases in both non-agency and agency MBS issuance volumes. The agency share of total issuance increased to 89.5 percent from 87.5 percent. Agency mortgage-related outstandings totaled $8.1 trillion as of the end of the first quarter, a 1. percent increase from the prior quarter and a 4.6 percent increase y-o-y. Agency Issuance and Outstanding Agency mortgage-related issuance totaled $397.7 billion in 1Q 18, a decrease of 12.2 percent q-o-q ($452.8 billion) and a decline of 5.1 percent from 1Q 17 ($419.2 billion). Agency MBS outstandings totaled $7. trillion, a 1. percent increase from the prior quarter and a 5.5 percent increase y-o-y, while agency CMO outstanding totaled $1.1 trillion, a 1.3 percent increase from the prior quarter and an.8 percent decline y-o-y. According to Freddie Mac, average conventional 3-year mortgage rates rose in the first quarter to 4.44 percent, up 52 basis points from 3.92 percent in the prior quarter. Non-Agency Issuance and Outstanding Non-agency issuance totaled $46.7 billion in 1Q 18, a decrease of 27.8 percent from 4Q 17 ($64.7 billion) but an increase of 7.6 percent y-o-y ($43.4 billion). Non-agency residential mortgage-backed securities (RMBS) issuance was $23.5 billion (down 29.2 percent q-o-q and 16.3 percent y-o-y), while commercial mortgage backed securities (CMBS) issuance was $23.2 billion (down 26.3 percent q-o-q but up 51.2 percent y-o-y). Non-agency outstanding was $1.3 trillion as of the end of the first quarter, a.5 percent fall from the prior quarter and a 4.4 percent fall y-o-y. CMBS outstanding was $516.5 billion, a 1.6 percent increase from the prior quarter and a 1. percent rise y-o-y, while RMBS outstanding was $776.3 billion, a 1.9 percent fall from the prior quarter and 7.7 percent fall y-o-y. Trading Activity Daily trading volumes for mortgage-related securities rose in the first quarter, with increases in both agency and non-agency trading volumes. Average daily trading volume of agency mortgage-related securities, including passthroughs, CMOs and TBAs, was $229.9 billion in 1Q 18, an increase of 5. percent from 4Q 17 and an increase of 7.8 percent y-o-y. Average daily trading volumes of non-agency securities fell slightly to $2.6 billion daily in 1Q 18, a decline of 2.9 percent q-o-q and 8.1 percent y-o-y. Agency CMO 5 Agency MBS TBA Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Source: FINRA TRACE 8

10 RESEARCH QUARTERLY RESEARCH REPORT 1Q 218 ASSET-BACKED SECURITIES Issuance of Asset-Backed Securities :Q Q1 ABS Issuance by Major Types of Credit 218:Q1 Other, $13.7B Equipment, $7.3B Credit Cards, $8.7B Student Loans, $5.6B Asset Backed Securities Outstanding 28:Q1-218:Q1 CDO, $11.6B Source: Thomson Reuters Auto, $3.8B Source: Bloomberg, Thomson Reuters, SIFMA Asset-Backed Securities Issuance Asset-backed securities (ABS) issuance totaled $77.8 billion in the first quarter, a decline of 49.6 percent q-o-q and 34.4 percent y-o-y. The auto and CDO sectors led issuance totals for the first quarter with $3.8 billion (39.6 percent of total issuance) and $11.6 billion (14.9 percent of total issuance), respectively. On a q-o-q basis, most major types of credit experienced a decline in issuance volumes in the first quarter, with the largest decline of 86.4 percent in the CDO sector. Credit cards, equipment, and other asset categories experienced q-o-q decreases of 4. percent, 7.1 percent, 36.3 percent respectively. Whereas auto, and student loans experienced increases in issuance with 18.9 percent, and 18.3 percent, respectively. Outstanding volumes ended the first quarter at $1.47 trillion, up 1.6 percent q- o-q and up 5.5 percent y-o-y. USD-denominated CDOs, auto, equipment, and esoteric ABS experienced increases in outstanding volume by.2 percent, 1.4 percent, 1.4 percent, and 3.9 percent respectively. Student loans, and credit cards experienced decreases in volume by.8 percent, and 8.5 percent respectively. Notable subcategories to see y-o-y growth were: equipment leases (21.7 percent), large ticket transportation (47.7 percent), consumer/personal loans (43.4 percent), franchise/whole business (43.4 percent), insurance (25.6 percent), PACE (31.1 percent), and USD-denominated CLOs (15.4 percent). Trading Activity Daily average trading activity in ABS and CDOs increased in 1Q 18 to $1.7 billion, an increase of 12. percent from $1.51 billion in 4Q 17 but a decrease of.9 percent from 1Q 17. Trading activity increased in both ABS and CDO markets, 7.3 percent and 37.8 percent q-o-q, respectively. 2 USD-denominated CDO Consumer ABS Source: Bloomberg, Thomson Reuters Eikon, SIFMA ABS and CDO Average Daily Trading Volume 213:Q4-218:Q Q'14 1Q'15 3Q'15 1Q'16 3Q'16 1Q'17 3Q'17 1Q'18 CDO ABS Source: FINRA Trace 9

11 RESEARCH QUARTERLY RESEARCH REPORT 1Q 218 $ Millions % 2.% 15.% 1.% 5.%.% U.S. CLO Issuance by Type Apr Mar. 218 Apr-17 Jul-17 Oct-17 Jan-18 Average IRRs by vintage 2 deals 2 deals 7 deals 1 deal 26 deals 9 deals 8 deals 8 deals 1 deal 6 deals US Reset US Refi US New Source: Creditflux, CLO-i Average of Final IRR US Average of Final IRR EUR 33 deals 6 deals 3 deals U.S. COLLATERALIZED LOAN OBLIGATIONS 5 2 deals Source: Creditflux, CLO-i Issuers excited by busy first quarter After 13 months of compulsory risk retention for US CLOs, it seems that the simplified regulatory regime is already encouraging a host of CLOs from returnees and new entrants to the market The first quarter of 218 has got the market feeling bullish about the coming year. In comparison to Q1 217, US new issue volumes grew 12.7 percent (rising from $14.8 billion to $29.9 billion) and mid-market CLO issuance increased by 68.7 percent (from $2. billion to $3.4 billion). European CLO new issues saw the largest rise of all, improving by 118 percent (from 2.9 billion to 6.2 billion). Risk retention: we barely knew thee In 217, the US and European CLO markets tackled risk retention side-by-side but Europe will soon be going it alone. The biggest CLO news of the year so far came when the LSTA prevailed in its lawsuit against the SEC and the Federal Reserve, with an appeals court ruling that US CLO managers are not subject to credit risk retention laws under the Dodd-Frank Act. The ruling certainly lowers the barriers to entry for wannabe CLO managers, but as one arranger points out it may not have an enormous effect on future volumes because loan supply will act as a constraint. John Popp, global head and chief investment officer of the credit investments group at Credit Suisse Asset Management, says that, even without risk retention, new managers face hurdles in attempting to break into the CLO market. For established institutions wanting to enter the credit market as managers, CLOs are the easiest point of entry for them after the risk retention decision. Standalone players, on the other hand, will have a harder time entering the market as I expect the capital markets to impose some discipline, he says. Voya Alternative Asset Management branched out to price its debut European CLO in the first quarter. The Scottsdale-based firm has an established US CLO business and the head of its senior loan group in Europe, Olivier Struben, says that Voya took a disciplined approach to putting together its inaugural European CLO. Our business is focusing on fundamental risk. Most important for us was to ramp a quality portfolio from the start, he says. 218 offered an opportune time for Voya to make its entrance due to favourable secondary loan prices. According to Struben: From a liability spread point of view, late December and early January would have been the perfect time to price. However, due to softening of secondary loan prices postpricing ramp conditions were not that bad at the end of March and in early April. Voya received a warm welcome from the market as Voya Euro CLO I was priced with a tight triple A spread of 75 basis points in line with the market average. Permira returns after 1 years Europe also opened its arms to Permira Debt Managers, which returned to the market after 1 years to price its first ever 2. deal. Arranged by BAML, Providus CLO I was a million deal with a triple A print of 74 bps. In the US, Greywolf Capital Management and Pretium returned to the new issue market after a break of three years, while Hayfin priced its first new deal, Hayfin Kingsland VIII, since acquiring Kingsland late last year. In April there have been further indications that new and returning CLO managers could thrive in 5 The author of the CLO section is Tanvi Gupta, Creditflux. For any questions, please contact Tanvi Gupta at tanvi.gupta@acuris.com. 1

12 RESEARCH QUARTERLY RESEARCH REPORT 1Q 218 the post-risk retention environment in the US. Post Advisory Group priced its first US CLO in April, while CarVal Investors began marketing its debut. 218 so far has been completely dominated by new issuance, with new deals accounting for 48.7 percent of the US CLO market, 93.3 percent of the mid-market CLO space and 6 percent of the European CLO market. A year ago, refinancings were flavour of the month (or quarter). In Q1 218, CLO equity investors instead favoured resets or refis: $6.7 billion of broadly syndicated loan CLO refis were seen in Q1 compared to $18.8 billion of resets a mammoth 348 percent increase from Q1 217 s reset volumes. US sees increase in re-issues Along with a reset wave, re-issues have gained in popularity. In Q1, six US managers re-issued their old deals to produce volumes of $4.2 billion. Citi arranged three of these deals, while JPM and Goldman Sachs each did two and BAML executed one. Although both reset and re-issue offer an extension on a CLO s reinvestment period, a possible reason for the growing popularity of re-issues could lie with the relative ease with which they van be processed. In recent years, the Crescent letter condition generally has restricted a reset of a CLO that has been previously refinanced, says Brad Larson, global head of CLO origination at Credit Suisse. He further adds: A legacy transaction reset may require a 1 percent equity vote, whereas a re-issue can be done via a simple majority, which makes achieving consent more likely. In Europe, million of refis were executed in Q1, versus 3. billion of resets. Spreads shift in and out Spread widening affected the global credit markets after a bout volatility in the equities markets in February. The CLO market weathered this storm pretty well with spreads shifting tighter through February. But March and April has seen spreads shift wider once more. There have been rumours that the cause may be Japanese banks temporarily stepping away from senior CLO tranches these institutions are heading into the end of their financial year and are less likely to be in risk-on mode in March. According to CSAM s Popp: Liabilites drifting wider has affected CLO equity returns somewhat, but the benefit of locking in these liabilities is that you can refinance if things really contract. In three to five years there is scope for spread tightening, which could dramatically improve CLO returns. In Europe, market participants believe it s a short term technical imbalance that has created the move wider. London-based Struben says: We have seen widening of liability spreads, resulting in higher average costs, while the collateral side remained roughly stable, reducing the arbitrage somewhat. At the same time, we believe that structural demand for European CLOs is increasing and will lead to tighter liability spreads in the longer run. 11

13 RESEARCH QUARTERLY RESEARCH REPORT 1Q 218 CORPORATE BOND MARKET Basis Points 1,8 1,6 1,4 1,2 1, , 1,8 1,6 1,4 1,2 1, Corporate Bond Issuance High Yield Investment Grade YTD Note: Includes all nonconvertible debt, MTNs Yankee bonds, and TLGP debt, but excludes all issues with maturities of one year or less, CDs, and federal agency debt Source: Thomson Reuters Mar-9 Mar-1 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar Corporate Option Adjusted Spreads to U.S. Treasury Mar Mar. 218 Corporate Bond Defaults 213:Q1-218:Q1 High Yield Investment Grade Source: Bank of America Merrill Lynch 1Q'13 1Q'14 1Q'15 1Q'16 1Q'17 1Q'18 Source: S&P Global Ratings 22 2 Upgrades Downgrades Q'13 1Q'14 1Q'15 1Q'16 1Q'17 1Q'18 Corporate Bond Rating Actions 213:Q1-218:Q1 Corporate Bond Issuance Corporate bond issuance totaled $38.7 billion in 1Q 18, up 19.3 percent from $319.2 billion issued in 4Q 17 but down 23.4 percent from 1Q 17 s issuance of $496.7 billion. More than a third of the bonds issued in the first quarter were for indebtedness reduction (37.4 percent of total issuance), followed by general corporate purposes (34.8 percent), and future acquisitions (8.9 percent). Investment grade (IG) bond issuance increased to $319.1 billion in 1Q 18, up 27.4 percent from $25.4 billion in the previous quarter but down 21.4 percent from $45.9 billion in 1Q 17. The top three industries accounted for over half of 1Q 18 IG issuance: financial companies remained the leading IG debt issuance sector, accounting for almost half ($149.5 billion) of all IG issuance, followed by the retail sector with 13.6 percent ($43.5 billion) and energy and power with 13.5 percent ($43. billion). Issuance of high yield (HY) bonds decreased to $61.6 billion in 1Q 18, 1.4 percent below the 4Q 17 s total of $68.8 billion and down 32.1 percent from $9.8 billion issued in 1Q 17. The following three sectors made up over half of total HY issuance in the first quarter: energy and power (26. percent, $16. billion), financials (22.9 percent, $14.1 billion), and materials (13. percent, $8. billion). Bond Spreads and U.S. Default Rate According to Bank of America-Merrill Lynch, option adjusted spreads for IG bonds as well as HY bonds widened in the first quarter of 218. Spreads of IG bond stood at 117 bps at the end of 1Q 18, up 18 bps from 99 bps at end- December 217 but down 7 bps from 124 bps at the end of March 217. HY bond spreads widened q-o-q, ending 1Q 18 at 372 bps, 9 bps above 363 bps in 4Q 17 but down 2 bps from 392 bps at the end of March 217. S&P s Global Fixed Income Research reported the number of U.S. defaulted issuers increased to 18 issuers in the first quarter of 218 from 15 in 4Q 17 and from 17 in 1Q 17. The U.S. trailing 12-month speculative-grade corporate default rate increased to 3.3 percent end-march 218, up from 3. percent end-december 217 but down from 4.1 percent end-march 217. The U.S. speculativegrade corporate default rate is expected to fall further to 2.6 percent by December In 1Q 18, S&P Ratings Services downgraded 86 and upgraded 8 U.S. issuers, a ratio of downgrades to upgrades of 1.1. This was a decrease from the previous quarter when there were 13 downgrades versus 55 upgrades (downgrade/upgrade ratio of 1.9). Source: S&P Global Ratings 6 Standard & Poor s Rating Services, NCSG And FirstEnergy Solutions Boost The 218 Global Corporate Default Tally To 27, April 5,

14 RESEARCH QUARTERLY RESEARCH REPORT 1Q Corporate Bond Average Daily Trading Volume 213:Q1-218:Q1 Private Placements High Yield Investment Grade Q1'13 1Q'14 1Q'15 1Q'16 1Q'17 1Q'18 Note: Includes nonconvertible corporate bonds only; private placements trading volume only available from 2Q'14 on. Source: FINRA TRACE Trading Activity According to the FINRA TRACE data, average daily trading volume of nonconvertible corporate bonds was $35.9 billion in 1Q 18, up 25.8 percent from $28.5 billion in 4Q 17 and up.2 percent y-o-y. Investment grade corporate bonds average daily trading volume increased to $19.1 billion in 1Q 18, up 27.2 percent from $15. billion in the previous quarter but down.9 percent from $19.3 in 1Q 17. High yield corporate bonds average daily trading volume was $9.2 billion in 1Q 18, up 23.7 percent from $7.4 billion in the previous quarter and up 3.3 percent from $8.9 billion in 1Q 17. Private placements average daily trading volume increased to $7.6 billion in 1Q 18, up by 25.1 percent from $6. billion in 4Q 17 but down.9 percent from $7.6 billion in 1Q

15 RESEARCH QUARTERLY RESEARCH REPORT 1Q 218 EQUITY AND OTHER MARKETS S&P 5, NASDAQ Composite Billions of Shares 8, 7, 6, 5, 4, 3, 2, 1, Daily Closing Stock Prices Mar Mar. 218 NASDAQ Composite S&P 5 Dow Jones Industrial Average Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Equity Average Daily Share Volume 213:Q1-218:Q1 32, 28, 24, 2, 16, 12, 8, 4, Dow Jones Industrial Source: Yahoo! Finance NASDAQ-listed Regional NYSE-listed 13:Q1 14:Q1 15:Q1 16:Q1 17:Q1 18:Q Equity Average Daily Trading Volume 213:Q1-218:Q1 Source: Bats Global Markets NASDAQ-listed Regional NYSE-listed The U.S. stock market posted a strong first quarter for 218 with two major stock indices reaching their record highs in March and one in January. The S&P 5 closed 1Q 18 at 2,64.87, a 1.2 percent decrease from the prior quarter but an 11.8 percent increase y-o-y and recorded an all-time high 2, on March 9, 218. The NASDAQ Composite Index closed 1Q 18 at 7,63.45, a 2.3 percent increase q-o-q and a 19.5 percent increase y-o-y, also reaching its record high of 7, on March The Dow Jones Industrial Average (DJIA) ended 1Q 18 at 24,13.11, a 2.5 percent decrease q-o-q but a 16.6 percent gain y-o-y and recorded its all-time high of 26, on January 26, 218. Equity Average Daily Share and Dollar Volume Equity average daily share volume was 7.6 billion shares in 1Q 18, an increase of 18.8 percent from 6.4 billion shares in 4Q 17 and an 11.4 percent increase from 6.8 billion shares in 1Q 17. The largest quarterly increase was observed in stocks on regional exchanges, where average daily share volume increased by 41. percent in 1Q 18. Average daily share volume of NASDAQ-listed and NYSE-listed stocks also increased by 16. percent and 15.1 percent q-o-q, respectively. Equity average daily dollar volume increased by 35.9 percent to $381.8 billion in 1Q 18 from $281. billion in 4Q 17 and was up 41.6 percent from $269.7 billion in 1Q 17. The largest quarterly increase in dollar volume was observed in regional-listed stocks (up 59. percent), followed by NASDAQ-listed (up 37.6 percent) and NYSE-listed (up 23.8 percent). NYSE Short Interest The number of shares sold short on the NYSE averaged 16.1 billion in 1Q 18, down.6 percent from 16.2 billion during the previous quarter but up 4.3 percent from 15.5 billion in 1Q 17. NYSE short interest was 2.5 percent above the five-year average of 15.8 billion. Out of approximately 6,1 issues, a short position was shown in 4,936 issues at the end of 1Q 18 and 3,94 issues showed a short position of 5, shares or more :Q1 14:Q1 15:Q1 16:Q1 17:Q1 18:Q1 Source: Bats Global Markets 2 NYSE Short Interest Mar Mar Billions of Shares Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Note: Includes short interest on NYSE, NYSE Arca and starting in July 215 NYSE MKT Source: NYSE 7 NYSE, NYSE Arca and NYSE MKT Short Interest Reports, April 11,

16 RESEARCH QUARTERLY RESEARCH REPORT 1Q Total Equity Underwriting 213:Q1-218:Q1 Volume 13:Q1 14:Q1 15:Q1 16:Q1 17:Q1 18:Q Source: Thomson Reuters 13:Q1 14:Q1 15:Q1 16:Q1 17:Q1 18:Q "True" Initial Public Offerings 213:Q1-218:Q1 Secondary Stock Offerings 213:Q1-218:Q1 Volume Note: Excludes initial public offerings of closed-end funds Source: Thomson Reuters Volume Equity Underwriting Volume Equity underwriting increased by 8.2 percent to $59.5 billion in the first quarter from $55. billion in 4Q 17 but was down 1.3 percent from $6.3 billion issued in 1Q 17. Equity underwriting volume in 1Q 18 was 7.2 percent below the fiveyear average of $64.2 billion. IPO Volume True initial public offerings (IPOs), which exclude closed-end mutual funds, increased to $16.1 billion on 44 deals in 1Q 18. IPO dollar volumes increased by 36.6 percent from $11.8 billion on 6 deals in 4Q 17 and was up 44.8 percent from $11.1 billion on 26 deals in 1Q 17. The top three sectors in IPO issuance in 1Q 18 by dollar volume were: high technology ($6.1 billion on 7 deals), industrials ($2.4 billion on 4 deals) and consumer products and services ($1.9 billion on 5 deals), which together accounted for almost two thirds of the quarter s total volume. Secondary Offerings Secondary market issuance increased to $41.3 billion on 197 deals in 1Q 18, an increase of 27.6 percent from $32.4 billion on 211 deals in 4Q 17 but a decrease of 4.1 percent from $43.1 billion on 226 deals in 1Q 17. Announced M&A Volume Announced U.S. mergers and acquisitions (M&A) volume stood at $598.9 billion in 1Q 18, a 23.1 percent increase from the previous quarter s $486.4 billion and a 55.6 percent increase from $384.9 billion in 1Q 17. M&A volume was 24.8 percent above the five-year quarterly average of $479.8 billion. According to data from Dealogic, the amount of U.S. Inbound M&A (money invested in U.S. companies by those outside the U.S. through M&A) fell to $8.8 billion in 1Q 18, down 5.1 percent from $85.1 billion in the previous quarter and down 2. percent from $82.4 billion in 1Q 17. The dollar amount U.S. companies invested in other countries through M&A ( US Outbound ) rose in 1Q 18 to $17.3 billion, up percent from $27.6 billion in 4Q 17 and up 49.9 percent from $71.6 billion invested in 1Q :Q1 14:Q1 15:Q1 16:Q1 17:Q1 18:Q1 Source: Thomson Reuters Announced Mergers and Acquisitions 213:Q1-218:Q1 Volume :Q1 14:Q1 15:Q1 16:Q1 17:Q1 18:Q1 Source: Dealogic 15

17 RESEARCH QUARTERLY RESEARCH REPORT 1Q 218 P/E Ratio VIX Index S&P 5 P/E Ratio Jan Mar. 218 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan Source: Standard & Poor's Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan SPX Volatility Index (VIX) Jan Mar. 218 Venture Capital Investments 213:Q1-218:Q1 Volume Source: Chicago Board of Options Exchange 1,8 1,5 S&P P/E Ratio The S&P 5 s P/E ratio averaged 22.1 in 1Q 18, up 1.2 percent from the previous quarter s 21.8 and up 7.2 percent from 21.2 in 1Q 17. The S&P P/E ratio stood 17.8 percent above the 5-year average of 18.7 but 22.2 percent below the high of 28.4 in 1Q. 8 CBOE VIX Index The Chicago Board Options Exchange Volatility Index (VIX) increased to an average of 17.4 in the first quarter, up 68.4 percent from an average of 1.3 in 4Q 17 and up 48.4 percent from 11.7 in 1Q 17. The quarter started with the index declining to a low of 9.15 in early January before spiking to in early February; the VIX ended 1Q 18 at The spread between high and low values for the VIX was in 1Q 18, much wider than 4. in 4Q 17 and a 2.5 spread in 1Q 17. Venture Capital Volume Venture capitalists invested $21.1 billion in 1,26 deals in the first quarter of 218, according to the MoneyTree Report from PricewaterhouseCoopers LLP (PwC) and the National Venture Capital Association (NVCA), based on data provided by Thomson Reuters. Quarterly venture capital (VC) investment activity increased by 3.9 percent in dollar terms but decreased by 2.2 percent in the number of deals compared to 4Q 17 when $2.3 billion was invested in 1,233 deals. The internet sector continued to receive the highest level of funding of all industries with $7.3 billion in 1Q 18, up 11. percent from $6.5 billion in 4Q 17 and up 32.1 percent y-o-y. The healthcare sector received second largest amount of funding with $5.3 billion (up 2.9 percent q-o-q) followed by the mobile & telecommunications sector with $3.5 billion (down 9.2 percent in 4Q 17) , :Q1 14:Q1 15:Q1 16:Q1 17:Q1 18:Q1 Source: Pricewaterhouse/Venture Economics/NVCA MoneyTree Survey 8 SIFMA records start in January 2. 9 US MoneyTree Report, 1Q

18 RESEARCH QUARTERLY RESEARCH REPORT 1Q 218 Kyle Brandon Managing Director, Director of Research Sharon Sung Vice President, Research Justyna Podziemska Assistant Vice President, Research SIFMA RESEARCH Daniel Konstantinovsky - Intern, Research Emily Losi - Intern, Research General Research Contact: research@sifma.org Craig Griffith Vice President, Capital Markets SIFMA CAPITAL MARKETS 17